Thoughts On Social Security And Medicare

For many years in Washington DC the gorilla in the room has been Social Security (and Medicare) and the fact that both face future problems with solvency. I posted about this a couple years ago but since nothing has been done I thought I’d post again.

Some would argue that since they are currently secure we don’t need to worry about things but to me that is like arguing that the cliff is still a half mile away so I can continue to race towards it at 70 miles an hour. While I can still probably stop in time doing so later will be harder on the system and run a greater risk of failure.

So to me the common sense thing is to solve the problem now, or to at least begin the process of solving it, thus ensuring we won’t face a bigger problem in the future.

When you have a problem with solvency there are two ways to resolve it, you can either increase income or decrease expenses. Obviously in the case of Social Security that is a very important decision since reducing expenses could mean reducing payments to beneficiaries.

Since many people are dependant, or are depending on income from Social Security I think we need to be very careful about this. With that in mind I would say that anyone who is within 25 years of eligibility (IE age 40) will get their benefits as scheduled. They’ve paid enough in and are close enough to retirement that they deserve security.

Having determined that we should next look to increasing income to the system by removing the cap on the social security tax. Right now the cap is at $ 106,800 meaning any income over that is not taxed. That seems unreasonable to me given the problems with the system.

It also seems to be that this should be something both sides can agree on. Democrats are rarely opposed to raising taxes on upper incomes so they should support it. Many Republicans support a flat tax or some other version of tax equality. Since the tax would be equal on all income levels it seems something they should be able to support.

While it might not entirely solve the problem with Social Security solvency, removing the cap would certainly go a long way towards that goal.

A second step on the income side would be to insure that money paid in to the Social Security trust fund is used strictly for Social Security payments. Given our current budgetary problems it might not be possible to implement this reform immediately but it is something that should at least be phased in over time (this also would allow us to view the true measure of the overall budget deficit).

Although improving the income side of the system would help it is not likely to solve it. Demographic trends are simply not in favor of the system and so we will need to make some changes on the expense side.

The first thing we could do is to retain the cap on benefits. Right now your benefits are based in part on how much you paid into the system. If we retain such a system then the increased income from lifting the cap would not solve the problem, it would merely expand it.

So we would need to retain the cap on benefits and it seems simplest to retain the current cap for purposes of payout while lifting it for purposes of taxation. I realize this will result in people paying tax for benefits thet do not get but we cannot justify paying higher benefits to someone who does not need them at the risk of denying basic ones to someone who does.

In short the price of a civilized society is that sometimes the better off pay more to help those who are less so.

A second step I think we need to take on the expense side is the eventual and gradual increase in the retirement age. When the social security system was first created it was intended as short term benefit for a few years of retirement. It was not intended to pay for 20 or 30 years or more and simply cannot do so if the system is to remain viable.

As I said before nobody over the age of 40 would face any change in their benefit so here we are looking at those under 40. I would suggest as a starting point the idea of a one year increase per decade.

So those between 30 and 40 would not qualify until age 67, those between age 20 and 30 would have to wait until 68, those between 10 and 20 would have to wait until 69 and those under 10 (or unborn) would wait until age 70.

I don’t see this as such an unreasonable burden for those of a much younger age and it would do much to insure future stability to the system. Of course we might have to include some sort of exemption for those who work at more physical jobs since they might have issues with later retirement but that could be worked out in time.

Of course if the math shows that the income reforms and the retained cap on benefit payouts allows for a more gradual increase in retirement age then we should stretch out the increases (perhaps doing 1 year every 15 or 20 years).

I’m sure there will be plenty of objections to these proposals, from those who want to only cut benefits to those who want to raise taxes but never increase retirement age. But we have to start to discussion